2. Background and Procedural History
On April 6, 2001, PG&E filed for protection under Chapter 11 of the United States Bankruptcy Code. PG&E's Plan of Reorganization (POR) under Chapter 11 became effective on April 12, 2004 (Effective Date). The POR incorporated the terms of the Modified Settlement Agreement approved by the Commission in D.03-12-035 to resolve PG&E's Chapter 11 proceeding.
To restore PG&E's financial health, D.03-12-035 authorized PG&E to collect $2.21 billion from its electric ratepayers over a nine-year period. Specifically, D.03-12-035 authorized PG&E to record a bankruptcy Regulatory Asset in the amount of $2.21 billion on an after-tax basis and to include the Regulatory Asset in rate base. PG&E was authorized to collect the Regulatory Asset from its ratepayers on a level, mortgage-style basis over a nine-year period starting in 2004. The total costs to ratepayers for the Regulatory Asset, including rate of return on the Regulatory Asset, income taxes, franchise fees, and uncollectibles, was expected to exceed $4.6 billion.4
To lower the costs borne by PG&E's ratepayers, D.03-12-035 directed PG&E to seek to issue $3.0 billion of Energy Recovery Bonds to refinance the Regulatory Asset and the associated federal income taxes and State franchise taxes.5 This action was expected to save ratepayers money because the interest rate on the Energy Recovery Bonds would be much lower than the rate of return on PG&E's Regulatory Asset. Decision 03-12-035 estimated that refinancing the Regulatory Asset with Energy Recovery Bonds would save PG&E's ratepayers approximately $1 billion on a nominal basis over the life of the Bonds.6
Decision 03-12-035 requires the principal and interest on the Energy Recovery Bonds to be paid with, and secured by, a new charge imposed on PG&E's electric ratepayers known as the DRC.7 Decision 03-12-035 explains that in a securitization, steps are taken to legally separate the underlying asset (here, the right to future cash flows to be collected from PG&E's customers through the DRC) from the utility. This is accomplished by selling the asset to a "special purpose entity" (SPE) to ensure that the asset is not part of the utility's estate for bankruptcy purposes. Thus, PG&E would sell the right to receive the DRC revenues to a SPE. The SPE, in turn, would issue the Energy Recovery Bonds, which would be secured by the SPE's ownership of the DRC revenues.8
Decision 03-12-035 contemplated that the Energy Recovery Bonds should have the highest credit rating possible in order to obtain the lowest interest rate possible (and lowest interest costs paid by ratepayers). To achieve the highest possible credit rating, D.03-12-035 anticipated that the DRC would have to be irrevocable so that neither the Commission nor any other governmental agency could rescind, alter, or amend the DRC in a way that would reduce or impair the value of the Energy Recovery Bonds. In addition, the DRC would have to be nonbypassable by utility consumers. The Bonds would also have to be structured so that bondholders would be protected from interruption or impairment of cash flow in the event of a utility bankruptcy, usually accomplished by a "true sale" to a bankruptcy-remote SPE, along with other steps to ensure that in a future utility bankruptcy, the SPE would not be substantively consolidated with the utility.
The Commission held in D.03-12-035 that it could not provide one of the key elements for obtaining the highest possible credit rating for the Energy Recovery Bonds, namely, the creation of a property right in future revenues. The Commission concluded that legislation would be required to create an enforceable property right.9
Decision 03-12-035 directed PG&E to "seek as expeditiously as practical to refinance the unamortized portion of the Regulatory Asset and associated federal and state income and franchise taxes using a securitized financing supported by a dedicated rate component.10" The Decision also indicated that the Commission would authorize PG&E to issue Energy Recovery Bonds secured by the DRC if certain conditions were met, including the enactment of "legislation satisfactory to the Commission, TURN, and PG&E...allowing securitization of up to the full unamortized amount of the Regulatory Asset and associated federal and state income and franchise taxes and providing for the collection in PG&E's rates of any...associated tax gross-up not securitized.11"
On June 7, 2004, Governor Schwarzenegger signed into law SB 772, which authorizes the issuance of Energy Recovery Bonds as envisioned in D.03-12-035.12 Some of the key provisions of SB 772 are as follows:
Energy Recovery Bonds Authorized: The Commission may authorize PG&E or an affiliate to issue Energy Recovery Bonds to refinance the Regulatory Asset and to finance the associated federal income taxes and State franchise taxes. (Sections 848(b), 848.1(a), and 848.2(a).)
Ratepayer Benefits: The issuance of the Energy Recovery Bonds is authorized only if the Commission finds that doing so will save ratepayers money on a present value basis. (Section 848.1(a).)
Nonbypassable Charges: The Commission can impose nonbypassable charges (which SB 772 calls "Fixed Recovery Amounts" and "Fixed Recovery Tax Amounts") on "Consumers," as needed, to pay the principal, interest, taxes, and other Bond-related costs. Except for a limited number of exemptions, these charges are applicable to all existing and future electric Consumers in PG&E's service territory. (Sections 848(d) and (e), and 848.1(a) - (d).)
Automatic True-Up Adjustments: There shall be automatic true-up adjustments of the nonbypassable charges, as necessary, to ensure sufficient funds for the timely payment of Energy Recovery Bond principal, interest, and related costs. (Sections 848.1(b) and (g).)
Irrevocable Financing Order: The Commission's financing order authorizing Energy Recovery Bonds, the nonbypassable charges, and amounts recoverable via the nonbypassable charges shall be irrevocable by future Commissions. (Section 848.1(g).)
State Pledge: The State of California pledges not to alter or limit the DRC. (Section 848.1(g).)
No Debt or Liability of the State: The State of California will not be liable for any amounts associated with the Energy Recovery Bonds or the DRC, and the State's credit and taxes shall not be pledged to pay for the Energy Recovery Bonds or associated costs. (Section 848.1(h).)
Current Property Right: Creates a separate and current property right (Recovery Property) representing the right to receive the revenues from the nonbypassable DRC. (Sections 848(j), 848.1(g) and (j), 848.3, 848.3(d), (e), and (g), 848.4(a) and (c), and 848.6.)
True Sale of Property Right: Authorizes the transfer of Recovery Property by PG&E to another entity as an "absolute transfer" and "true sale." (Sections 848.1(g), 848.2(c), 848.2(c), and 848.4(a).)
Pledge of Property Right as Collateral: Authorizes the pledge of Recovery Property by its owner for the benefit of Energy Recovery Bond investors. (Sections 848.2(b) and (c).)
On July 22, 2004, PG&E filed A.04-07-032 for authority pursuant to SB 772 and D.03-12-035 to refinance its bankruptcy Regulatory Asset via the issuance of up to $3.0 billion of Energy Recovery Bonds through a legally separate Special Purpose Entity (SPE).13 Notice of A.04-07-032 appeared in the Commission's Daily Calendar on July 26, 2004. PG&E filed supplements to A.04-07-032 on August 12, August 27, September 3, September 8, and September 22, 2004.14
The following parties filed protests and/or comments: The Merced Irrigation District (Merced), the Modesto Irrigation District (Modesto), the Office of Ratepayer Advocates (ORA), and The Utility Reform Network (TURN). PG&E submitted responses to all the protests and comments.
Pursuant to Section 848.1(i), the Commission has 120 days from the date that A.04-07-032 was filed to approve or disapprove the Application. This Financing Order is being issued within the 120-day timeframe.
4 A.04-07-032, Chapter 4, Table 4-1.
5 D.03-12-035, Ordering Paragraph (OP) 9. Rehearing was denied in D.04-03-009.
6 D.03-12-035, mimeo., pp. 4, 72, and 74.
7 D.03-12-035, mimeo., pp. 3, 67, and 72.
8 D.03-12-035, mimeo., p. 68.
9 D.03-12-035, mimeo., p. 71.
10 D.03-12-035, OP 9.
11 D.03-12-035, OP 9.
12 2004 Stats., ch. 46. SB 772 took effect immediately. (2004 Stats., ch 46, §11(g).)
13 All references to A.04-07-032 include the prepared testimony attached to A.04-07-032.
14 PG&E submitted additional information via email sent to the assigned ALJ and the service list on September 14, September 23, September 30, October 12, and November 12, 2004.
